New Asian Haven: Korea

South Korea is poised to issue a record amount of bonds in September as investors seek the relative safety of Korean assets amid uncertainty over the outlook for emerging markets.

Already this month, South Korea's government and companies have issued $3.98 billion of international bonds—the most in a year, according to Dealogic, a data provider. That has helped drive issuance in Asia, excluding Japan, to the highest level since May, when the U.S. Federal Reserve sparked an exodus from the region's emerging markets by signaling that it was preparing to wind down its monetary stimulus.

During the third quarter, South Korea has reclaimed the title of the biggest issuer of international bonds in Asia, excluding Japan, accounting for 36% of the total, as expectations that interest rates would rise brought issuers to the market, seeking to borrow before costs increase. It is a ranking South Korea held for most of the past decade before being surpassed by China last year.

If market conditions hold up, South Korea's total is expected to exceed $6 billion before the month is ended. That would surpass the $5.9 billion issued in January 2012 as the most bonds ever issued in the country in a single month.

The leap in bond issuance comes at a heady time for South Korea's financial markets. The country's strong finances and economy have recently earned it the status of a haven, relative to its peers, enabling Korea to avoid much of the market turmoil that rocked other Asian countries this summer.

Demand for South Korean assets has been supported by the nation's record-high foreign-exchange reserves, $331.09 billion at the end of August, which have given investors confidence that the nation could weather a shock. The central bank expects the current-account surplus to reach a record $53 billion this year.

The country's strengthening economy has been another big draw. It grew 1.1% in the second quarter from the previous three months, its fastest in two years.

"It just happens that South Korea is located in a region that falls within the emerging-markets bracket. Yet the country has robust public finances, a deep local bond market, as well as a number of international companies like Samsung, Hyundai [and] Kia Motors that are recognized world-wide," said
Herman van den Wall Bake,
head of Asian fixed-income capital markets at Deutsche Bank AG.

"These make it equivalent to a first-world country and appeal to sophisticated investors from the U.S.," he said.

The benchmark Korea Composite Stock Price Index has risen 12% since the end of June. The won, meanwhile, has gained 8% against the U.S. dollar over the past three months, according to FactSet.

Investors have snapped up Korea's bonds as well. A $750 million offering this month by Korea Development Bank attracted demand for more than four times the amount of bonds on offer. Prices have risen in the secondary market. Average prices of U.S. dollar-denominated South Korean bonds have risen 2.7% since the end of June, according to the HSBC Asia Dollar Bond Index.

To be sure, Korea's return to the top of the rankings comes as Asia remains on course for its worst quarter for bond issuance since the fourth quarter of 2011. And despite the recent surge, South Korea is on pace for issuance for the full year to decline from last year.

Yet South Korean companies are still lining up to tap the market. Woori Bank, the flagship bank of
Woori Finance Holdings
Co.
, South Korea's largest banking group by assets, sold a $500 million dollar bond on Tuesday. On Monday, GS Caltex Corp. sold $400 million of dollar bonds.

And if the market cooperates, at least another $2 billion of new bonds will be issued by Korean companies by the end of the month, people with knowledge of these deals said.

"There will be lots of issuance between [this] week and November as issuers face [an] increasing-interest-rate outlook," said
Andy Choi,
head of debt capital markets in Korea at Barclays PLC.

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